Former US President Donald Trump during a campaign event at Trump National Doral Golf Club in Miami, Florida, US, on Tuesday, July 9, 2024.

Eva Marie Uzcategui | Bloomberg | Getty Images

As markets speculate on the potential reelection of Donald Trump, Goldman Sachs economists have raised concerns about the implications it could have on the euro area’s economy. According to Jari Stehn and James Moberly from Goldman Sachs, a second term for Trump could result in a significant GDP hit of around 1% and a modest increase in inflation.

Trade policy uncertainty, defense and security pressures, as well as spillover effects from U.S. domestic policies could all impact Europe if Trump were to be reelected.

Following an assassination attempt on Trump, some analysts believe that this event may boost his chances of winning the upcoming U.S. election. Market assets have already rallied in response to this possibility, with betting markets assigning a 60% probability of a Trump victory in November.

During Trump’s previous term, trade tensions between the U.S. and the EU escalated, leading to tariffs and market uncertainties. If Trump were to impose a 10% tariff on all U.S. imports, it could create further trade policy uncertainties, impacting the euro area’s economy.

Trump’s stance on defense and security could also affect Europe’s economy. Potential cuts in U.S. aid for Ukraine and increased defense spending requirements for NATO allies could lead to additional financial burdens on European countries and geopolitical uncertainties.

U.S. domestic policies under a second Trump term, such as tax cuts and regulatory changes, could spill over into Europe, affecting economic activity. While anticipated tax cuts may boost economic activity, other market shifts could limit the overall impact on the euro area’s economy.